The hype with technology stocks continues as Nvidia Corp. (NASDAQ: NVDA) makes all-time highs. There's enough reason to be bullish on semiconductor stocks, but not all are equal. Here's how you can gain an edge.
A significant shift is coming to the supply chain roadmap in chip and semiconductors, especially now that the U.S. and China keep escalating their chip wars.
Markets have shied away from Taiwan Semiconductor Manufacturing Company Ltd. (NYSE: TSM) because Taiwan is threatened by invasion from China, which would severely disrupt supply chains for significant U.S. names. However, some institutions are willing to place the contrarian bet.
Taiwan Semiconductor: The Top Pick
A few names took the chunk of funding after the Chips and Science Act passed, a multi-billion dollar attempt to build fabrication plants (fabs) for domestic chip production. Investors fled into stocks like Intel Corp. (NASDAQ: INTC), Advanced Micro Devices Inc. (NASDAQ: AMD) and Apple Inc. (NASDAQ: AAPL), as they have brought indexes to all-time highs.
However, Taiwan Semiconductor supplies most of the components and materials these two companies need to make their chips.
Bloomberg Intelligence sources point to a potential $5 billion coming to Taiwan Semiconductor in the latest round of incentive funding. The company will build its presence in Arizona to help the government's goal of onshoring chip supply chains.
After a nearly 50% rally over the past few quarters, some on Wall Street still see a higher ceiling in the coming months.
Growth Leader at a Discount
Price action is only one of the many ways you can gauge market sentiment. Taiwan Semiconductor stock trades at 90% of its 52-week high, on par with Nvidia and Advanced Micro Devices, which trade at 92% and 85%.
More traditional valuation metrics, like the forward price-to-earnings ratio (forward P/E), can help you better understand potential upside. Valued at 18x forward P/E, Taiwan Semiconductor stock offers 46% to NVIDIA and 51% to Advanced Micro Devices.
Leaning on these discounts, Fisher Asset Management (known for its long-term value investing approach) upped its stake in the stock this month. Increasing its exposure by 1.4% meant a transaction above $45 million.
Analysts at Susquehanna Bancshares Inc. (NASDAQ: SUSQ) followed suit in this bullish narrative. In its price target boost for Taiwan Semiconductor stock, the company now sees a valuation of up to $160 a share, calling for an upside of roughly 12% from where the stock trades today.
These same analysts project earnings per share (EPS) growth of 24% over the next 12 months for the chipmaker, placing it above Nvidia's 9% projection.
The forward P/E is the market's way of placing today's value on tomorrow's earnings. Knowing that Taiwan Semiconductor stock is set to grow its EPS above competitors, fear is the only reason its forward P/E is so low.
